As of this writing, we’re still in the middle of one of the most extended real estate booms in many years. Home prices have soared for more than a decade (and have become even hotter over the past two to three years).
The same goes for rental rates, which have climbed so high in certain regions that landlords are wary of getting locked into long-term agreements for fear they’ll end up undercutting themselves in six or nine months.
But no matter how hot a market gets, it will eventually come down. And even though the long-term trajectory is firmly up and to the right on a market growth chart, there will inevitably be blips and dips along the way.
When you’re a real estate investor, such dips can either hurt you or present incredible opportunities to expand your portfolio. If you prepare for them ahead of time, you’ll be in a much better position to benefit from the next falling market.
Six Tips for Navigating Down Markets
If you know how to play it, a down market can actually be more lucrative than a hot one. Here are six essential tips to help you get there.
1. Expand Your Rental Portfolio
The average person associates a recession or financial downturn with concerns like depressed real estate prices, stock market tumbles, unemployment, and foreclosures. These are undeniably substantial factors in what make recessions so tough.
But if there’s one investment that’s well insulated from these problems, it’s residential rental properties. Real estate isn’t directly tied to the stock market; and even if property values take a dive, one item stays relatively strong even in the coldest markets: rent prices.
That’s because demand increases during these periods. Fewer people can qualify for a mortgage or even afford a home, so they rent instead.
And because shelter is usually the most significant bill on a person’s budget, people are willing to pay what it takes to live in a secure and comfortable space.
If you want to recession-proof your financial portfolio and guarantee yourself a steady stream of income even in the most challenging of times, start acquiring rental properties. As long as you don’t get stuck in a situation where you don’t have renters (which tends to be rare), this is about as risk-free an investment as you can find during a market downturn.
2. Consider Rent Guarantee Insurance
Let’s say the worst-case scenario occurs and you have a pile of rental properties but can’t find tenants. (We repeat: This is very unlikely to happen; even at the height of the 2008 market crash, rental income held strong.)
In this case, you could protect yourself in advance with rent guarantee insurance. Every policy is different, but a typical rent guarantee insurance policy will provide rent payments for up to six months after a tenant defaults on the payments.
This gives you enough time to address the underlying issues and keep your properties afloat until you can either evict the tenant or he or she is able to start paying again.
If you use our professional property management services, we even have a rental income guarantee built into the plan. As long as a tenant is screened, placed, and approved by Green Residential, we’ll reimburse lost rent in the event the tenant defaults.
3. Stay Liquid
If you sense a market downturn coming, it’s a sharp move to become as liquid as you can. The most successful investors during recessionary periods are the ones who arrange the greatest liquidity.
As the great Warren Buffet says, be fearful when others are greedy and greedy when others are fearful. Liquidity empowers you to turn greedy when other people are shedding real estate like it’s a disease.
4. Know How to Spot Motivated Sellers
Although you should be liquid and ready to pounce during a falling market, you don’t want to be foolish or “trigger happy.” In other words, you still have to be disciplined and patient.
The key is to know how to spot motivated sellers who would be happy to give you a deal so they can move on. Signs of a motivated seller include:
- A home that’s been on the market for months and has undergone several price reductions over that period
- A home that’s empty at showing (meaning the homeowner has moved and may be holding onto two mortgages at the same time)
- Houses that look dilapidated and have grass that hasn’t been mowed in weeks
If you’re a real estate investor, you can land a good deal and simultaneously make a positive difference in someone’s life by alleviating the person’s worst pressure point. That’s what we call a win-win situation!
5. Think Long Term
You’re probably not going to make a pile of cash investing in house flips during a market downturn. It’s possible, but there usually isn’t enough meat on the bones and/or buyer-side demand.
Instead, think about long-term investments instead of fast deals. This is a good time to buy rental properties and/or use BRRRR strategies.
6. Don’t Get Emotional
There’s no room for emotions in real estate investing. You know this intuitively, but it’s much harder to practice this wisdom when you get into the heat of the moment.
Shopping in a down market is like going to your favorite store and finding everything on clearance. Suddenly, emotion floods in and you want everything.
But you can’t have everything. Just because there are good deals out there, that doesn’t mean they’ll fit into your portfolio (or that there aren’t nasty issues lurking below the surface).
Avoid investing in something just because it’s a good deal – you’ll encounter plenty of them in this market. And whatever you do, don’t fall into a bidding war with another investor! Let go of your ego and thrive to make an offer elsewhere.
Work With Green Residential
Green Residential is proud to be the leading property management company in the Houston and Austin markets. Boasting more than four decades of experience offering affordable flat-rate management fees to thousands of real estate investors and landlords, we’re confident we can help you reduce stress, improve cash flow, and expand your portfolio.